India’s Reliance Communications has only days to reach an agreement for a tie-up with South Africa’s MTN, but falling shares and a face-off between the Ambani brothers could scupper a deal.
Reliance Communications, controlled by Anil Ambani, is currently in exclusive talks with MTN to create a global 10 telecom company, but this agreement ends on July 8.
However, in mid-June Reliance Industries, run by older brother Mukesh Ambani, claimed first right of refusal on India’s number 2 mobile operator, based on a deal signed when their late father’s business was being split between the brothers.
The bitter rivalry between India’s two richest men has shown no sign of letting up.
In an email statement on Thursday, Reliance Industries (RIL) said it had invoked a dispute resolution agreement to settle the differences and invited Reliance Communications to participate, but this was immediately dismissed by a Reliance Communications spokesperson.
”RIL has invoked the provisions of dispute resolution contained in the non-competition agreement dated January 12 2006, and has invited RCOM to participate in the process of mutual conciliation prior to the commencement of formal arbitration,” India’s most valuable listed company said.
”This is only a sign of RIL’s increasing desperation and frustration,” a Reliance Communications spokesperson said.
MTN, sub-Saharan Africa’s top mobile operator, has about 68-million subscribers in nearly two dozen countries. Reliance Communications, the second largest mobile operator in India, has 48-million subscribers.
”The tiff has almost certainly scuppered the deal,” said Emeka Obiodu, a senior mobile technologies specialist at London-based research firm Global Insight.
”As long as there is any uncertainty about the legal validity of a deal, it is unlikely MTN will go through with it. And there is no point in extending talks if the situation will not change.”
Shares in Reliance Communications have shed a third of their value since the company said in May the firms were considering a potential combination. The company’s shares fell 6,9 % on Thursday.
Reliance Communications said last month the claim by Reliance Industries would not delay its talks with MTN. But traders in Mumbai earlier this week said concerns that Mukesh may throw a spanner into the works had helped push down the share price.
The lower valuation of Reliance Communications, which now has a market worth of about $18-billion, down from nearly $27-billion when it first said it was in talks, could spoil the share swap that the two firms were reported to be discussing.
Media reports and a source close to the development had indicated the two firms were aiming at a reverse takeover, with a share swap that would give the Anil Dhirubhai Ambani Group the largest shareholding in MTN, and making Reliance Communications a subsidiary of MTN.
”Ambani may also need more cash, now that valuation has fallen, and that will be difficult in this market,” Shah said, adding the deal had a ”50% to 55% chance” of going through.
Other suitors
Newspapers reported on Thursday that Reliance Communications along with investors, including Middle East sovereign wealth funds, may buy a majority stake in MTN rather than merge operations as planned earlier.
A spokesperson for Reliance Communications declined comment.
Reliance Communications may also consider a revenue-sharing agreement, said Kevin Trindade, analyst at KR Choksey Securities.
”They will have to restructure the deal. The legal challenge from Reliance Industries can open a whole can of worms and a lengthy legal battle can drag the shares lower,” he said.
A potential combination of MTN and Reliance Communications will have operations in about two dozen countries.
Reliance Communications, which has snapped up a series of smaller overseas assets recently, will not be content simply with growth in the Indian market, which Gartner consultancy forecast would expand cellular services revenue at 18% annually and add subscribers at 21% a year till 2012.
It is keen on Africa: it recently bought a telecoms firm in Uganda, and was one of four bidders last year for a controlling stake in Telkom Kenya, which went to France Telecom.
This time around though, it cannot hope to fend off other suitors for MTN, Obiodu said.
”MTN has signalled it’s on the market and other bidders may only be waiting for the exclusivity period to end before they throw their hat into the ring,” he said.
”Vodafone, France Telecom, Deutsche Telekom and China Mobile are all interested in the Middle East and African markets,” he said.
Mukesh and Anil Ambani were ranked by Forbes magazine earlier this year as the world’s fifth and sixth richest men respectively.
They proved unable to work together after their father’s death in 2002, and in 2005 their mother split the Reliance empire between the two. The formal split took place in 2006. — Reuters